Chapter 1



CHAPTER 3. EXCEPTION PROCESSING

Regardless of how the debt arises, the result is the same: the debt is entered in DCAMS, and the collection process begins. Any questions, defenses, or issues raised by the debtor should be addressed as part of an effective debt collection effort. Additional information involving generic commercial debt disputes may be found in Paragraph 8-8.

1. CONTESTED OR DISPUTED BALANCES. If a debtor contests or disputes the amount claimed, the DSR/LSS should provide copies of the documents that are the basis for the debt, a detailed explanation regarding how the initial debt amount owed HUD was calculated, and a financial history of the case. If these items do not resolve the dispute, the DSR/LSS should request that the debtor provide details and documentation regarding the issues in dispute (e.g., evidence of payments for which no credit was given). The DSR/LSS must evaluate this information and respond to the debtor. If there is any question regarding HUD’s response, the DSR/LSS should consult with his/her supervisor. If the debtor acknowledges liability for the debt, but disputes the amount owed, the DSR/LSS should ask for payment on the undisputed portion of the balance but continue to attempt to resolve the dispute.

If the DSR’s or LSS’s efforts to resolve a contested debt are unsuccessful, the case should be routed to an FOC Director for an official determination. If the Director determines that the debt is valid and legally enforceable in the amount claimed by HUD, then collection efforts may continue. Prior to referring the debt to the Treasury Offset Program (see Paragraph 4-2) the debtor has the right to request an administrative review of the debt (see Paragraph 3-7). If a review is conducted, the Administrative Judge’s decision is the final agency decision with respect to the past-due status and enforceability of the debt.

2. DEBT WAIVERS. Waiver means the cancellation, remission, forgiveness, or non-recovery of a debt. As there is no provision in HUD’s Regulations for a waiver of a Title I claim (see 24 CFR 201.61), a Title I debtor’s request for a debt waiver must be rejected. If a Title I debtor disputes the existence, amount, or enforceability of his/her debt, the dispute should be handled as outlined in Paragraph 3-1.

If there is an applicable statute or regulation that authorizes or requires HUD to consider a waiver of a generic debt, the responsible HUD program area must conduct any required waiver review. This review should be completed and result in a determination that a debt waiver not be granted before the debt is transferred to the FOC for collection action (see Paragraph 8-3.) If a debtor requests a waiver of a generic debt serviced by the FOC, the DSR should contact the HUD program area where the debt originated to determine if there is any basis for a waiver, and to coordinate a review and decision by the program area as appropriate. The DSR should suspend collection activity on a debt while a waiver review is being processed (see 31 CFR 903.2.)

A debtor may be released from liability if the debt is determined to be unenforceable (see Paragraph 5-12, A.). A debtor may also be released from liability without making full payment via a settlement by compromise (see Paragraph 2-8) or via a partial settlement (see Paragraph 2-9).

3. CREDIT BUREAU REPORTING DISPUTES. If a debtor appeals the CB Letter (i.e. HUD's Notice of Intent to Report to a Credit Bureau) (see also Paragraph 2-1, E), the DSR/LSS must initiate action to update DCAMS with a “stop code” to prevent credit bureau reporting until HUD’s review of the matter is completed. The DSR/LSS should process the appeal in accordance with the procedure described in Paragraph 3-1. If HUD concludes that credit bureau reporting is appropriate, the DSR/LSS must take action to update DCAMS again to remove the stop code. (See the DCAMS User Manual for details.)

When an account is being reported to the credit bureaus and a debtor contacts HUD to dispute the debt, the DSR/LSS must take action to promptly and properly code DCAMS to reflect the dispute. (See DCAMS User Manual.) The account will continue to be reported to the credit bureau, but the record will indicate that the account involves a dispute. The dispute must be promptly investigated and the debtor advised of HUD’s determination. Once the dispute is resolved the DSR/LSS must take action to update DCAMS.

In addition to contacting HUD to dispute information reported to a credit bureau, a debtor may submit a dispute to the credit bureau. When this happens, the credit bureau is required to provide a prompt notice of the dispute to the furnisher of the disputed information. Upon receipt of such notice, HUD must promptly investigate and respond to the credit bureau either confirming the accuracy of HUD’s previously reported information or providing an appropriate correction/update. If a correction/update is warranted, the DSR/LSS must update DCAMS as necessary to insure that subsequent credit report updates are accurate.

4. COMPLAINTS AND PROGRAM VIOLATIONS. The Debt Servicing Representative should review a case for a possible repurchase (see paragraph 3-10) if there are complaints or other program violations reported by a Title I debtor. If there is any indication of a criminal violation, the DSR/LSS is not responsible for an official investigation, but should attempt to tactfully secure sufficient essential information to serve as a basis for subsequent referral.

The reporting of most program violations should not prevent continued, vigorous collection efforts against the debtor. The DSR/LSS should ask the debtor to explain her/his complaint in writing and attempt to secure an amicable adjustment. The DSR/LSS must exercise care so as not to discredit the alleged offender or prejudice the outcome. If there is any question regarding how to handle a complaint or violation, the DSR/LSS should consult with his/her supervisor.

A. Criminal Activities. Evidence of criminal activity, including forgery, should be referred to the HUD Office of Inspector General’s Office of Investigations in the HUD Regional Office with jurisdiction for the state where the activity occurred. In no event should FOC staff investigate a possible criminal violation or irregularity.

All HUD employees are responsible for reporting suspected incidents of misrepresentation, fraud, waste, and abuse to the Office of the Inspector General or another appropriate authority. Information regarding this responsibility is provided in the following links:







B. Title I Program Violations. Significant violations of Title I program requirements should be promptly referred to the Single Family Quality Assurance Division in the Homeownership Center having jurisdiction over the state in which the property is located. Form HUD-55017, Title I Violation(s) – Compliance Report (see Appendix 11) may be used to make the referral with any available supporting information or documentation. Some examples include:

1. Falsification and/or omission of pertinent information from the credit application or other official document.

2. Obtaining the borrower’s signature on the Title I Completion Certificate or Title I Placement Certificate prior to the completion of the improvements or installation of the manufactured home, or similar false certification.

3. Duplicate financing.

4. Misuse of the loan proceeds (Title I property improvement loan).

5. Payment or promise of a cash “kickback.”

C. Service Complaints. Complaints involving (but not limited to) materials/products, workmanship and pricing do not constitute criminal activities. In most cases (see information about exceptions in paragraph 3-4, E. below), HUD is not responsible for resolving service complaints for a direct Title I property improvement loan, since the borrower had full control over the selection, supervision, and payment to any contractor used. For other debts, the DSR/LSS may need to resolve the complaint in order to successfully collect the debt.

D. Dealer Responsibility. The dealers in all Title I dealer loans are accountable for certifications on loan documents. Administrative sanctions may be taken against a dealer for irregular acts, nonperformance, and/or failure to carry out the contractual agreement with the borrower. Violations should be referred to the Single Family Quality Assurance Division.

E. Claim or Defense of Debtor against Dealer. A Title I debtor, with a valid complaint against the dealer, may have a defense against her/his payment of the loan based on the Federal Trade Commission's anti-holder-in-due-course rule (16 CFR Part 433). This rule is applicable to dealer property improvement loans, and to manufactured home loans and direct property improvement loans that are based on a retail installment contract with the dealer as a party. The rule also may apply to any direct loan when there is a relationship between the lender and the dealer. Since the lender must give HUD a valid and enforceable note, there can be no unresolved issues between the borrower and the dealer that can be asserted against HUD. If there are, a referral for repurchase should be considered.

3-5 ALLEGATIONS OF FORGERY. An allegation of forgery may be valid or be a ruse to avoid payment. As a first step, the DSR/LSS should review all available documentation including the presence of notarized documents and information regarding who received the financial benefit from the transaction. The results of this review should be used to clarify and confirm the details of the allegation and to assess the credibility of the person making the allegation.

Forgery allegations (and allegations of identity theft) require careful handling. The process to be followed depends on the particulars of the allegation and the status of the debt. The DSR/LSS should consult with his/her supervisor to determine how to handle the case. A written declaration setting forth the full particulars may be required as well as specimen signatures for an expert handwriting analysis.

A. Declaration. The declaration (see Appendix 12), if required, must include a complete description of the facts in the case, including the items listed below. The declaration need not be notarized, but must include a statement that the information provided is true and correct and be signed “under penalty of perjury.”

1. A positive statement that the signature(s) on the note, contract, credit application or completion certificate (as applicable) is not genuine and that it was placed on the document without her/his knowledge or consent.

2. A statement that the signature has not been ratified, and that the defense of forgery will be used in any suit to enforce payment of the note.

3. A statement as to what contact, if any, the person concerned has had with the dealer, salesperson, or lender.

4. A statement as to whether the person concerned obtained any benefits from the loan, explaining in detail any payments that have been made.

5. A statement including the possible identity of persons responsible for the forgery.

B. Handwriting Analysis. FOC staff should coordinate with the Office of Inspector General (OIG) and/or with the Federal Bureau of Investigation (FBI) regarding the requirements for handwriting samples and obtaining a handwriting analysis. If a handwriting analysis via OIG/FBI is not available, the DSR/LSS may request that the alleged debtor obtain a handwriting analysis at his/her expense, using a handwriting expert either chosen by or approved by HUD.

C. Other evidence. The DSR/LSS should obtain evidence relating to the allegation from other sources, if available. Some forgery claims involve a signature that was placed by the co-debtor, usually a spouse, either at the direction of the debtor or pursuant to a power of attorney, and the co-debtor should be questioned. Inquiry should also be made of the lender and, in the case of a dealer loan, the dealer as to who signed the loan document(s).

3-6 BANKRUPT DEBTORS. Bankruptcy is a legal process through which a debtor can seek the protection of the court against creditors to gain a fresh start. The Bankruptcy Court has the authority to discharge the debtor's personal liability for most debts. The Court also has the authority to approve the distribution to creditors of available assets from the debtor's bankruptcy estate. Most consumer bankruptcies will fall under Chapters 7 and 13. Under those chapters, the court designates a trustee to oversee the liquidation and distribution of the assets and/or payment to creditors.

Bankruptcy law was substantially revised on April 20, 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted. This Act was intended to protect overburdened consumer debtors who legitimately require financial relief. At the same time, the Act sought to curtail fraud and bring greater stability and fairness to the US financial system. The Act establishes a means based system to evaluate the debtor’s income and allowed expenses to determine bankruptcy eligibility. Under the Act, debtors are required to receive credit counseling in order to qualify for bankruptcy. Other filing requirements in the Act serve to discourage repeat filings. Overall, the Act serves to strengthen the position of creditors in bankruptcy proceeding and discourage bankruptcy abuse. FOC Staff should consult with the local HUD Office Chief Counsel when any technical matters arise regarding bankruptcy processing or the impact of the current bankruptcy laws on HUD effort to collect a specific debt.

Though Bankruptcy Court is a federal judicial body, local rules govern various procedural matters. FOC staff should seek the advice of the appropriate HUD Counsel regarding specific local procedures. The local HUD Office Chief Counsel is the appropriate HUD Counsel for case specific bankruptcy issues. The Regional Counsel for Region II is the appropriate HUD Counsel for general bankruptcy issues (i.e. non specific to a particular case). If necessary, and with assistance of HUD Counsel, appropriate staff of the FOC may obtain the advice of the Financial Litigation Division of the appropriate U.S. Attorney’s Office.

Bankruptcy accounts are accounts for which the FOC has received notice from a bankruptcy court that a debtor has filed for bankruptcy protection. The DSR/LSS is responsible for the correct coding of DCAMS and the monitoring of bankruptcy accounts. The DSR/LSS is also responsible for seeking the assistance of the local HUD Office Chief Counsel, when required, to protect the Government's interest on a specific bankruptcy account.

A. Types of Bankruptcies.

1. Chapter 13. A Chapter 13 bankruptcy allows an individual debtor with regular income to reorganize debts. It provides for a repayment arrangement over a 3-5 year period without the liquidation of assets. This plan typically pays unsecured creditors a percentage of what the debtor owes. The debtor makes payments to a court-appointed Trustee who transmits payments to creditors pursuant to the approved plan. Secured creditors are usually scheduled to receive their normal monthly payments direct from the debtor (i.e. outside the plan) with the arrears paid by the Trustee during the term of the plan.

2. Chapter 7. A Chapter 7 bankruptcy is also known as a “straight” bankruptcy, and provides a mechanism for a debtor to obtain a release from personal liability for debts owed. This is the discharge in bankruptcy. A Chapter 7 bankruptcy discharge does not discharge a secured debt, only the debtor’s personal liability, and therefore the creditor may pursue an action against the property (security) to recover the debt.

A Chapter 7 case is strictly a liquidation process and does not entail a plan for distribution. The debtor can exempt certain assets (including limited equity in a residence) from this liquidation to make a fresh start after bankruptcy. By law, the trustee succeeds to ownership of all the debtor's non-exempt property. Consequently, all contacts should be with the trustee or the trustee's attorney rather than with the debtor or the debtor's attorney, if any.

A debtor must pass a “means” test in order to file a Chapter 7 bankruptcy. If the court determines that the debtor has sufficient income to pay a substantial part of the amount owed to creditors, then the debtor may be required to file a Chapter 13 bankruptcy rather than Chapter 7.

Many Chapter 7 bankruptcies are "No Asset" bankruptcies. This does not mean the debtor has no assets. This means the debtor lacks non-exempt assets that may be liquidated, and thus the court does not expect there to be a distribution of funds to unsecured creditors. This lack of distribution may be due to the value of the property, the existing liens on it, and/or the debtor's available exemptions. No Asset bankruptcies usually follow an abbreviated procedure.

3. Chapter 11. Persons engaged in business (corporations, partnerships or individuals) may file Chapter 11 bankruptcy to reorganize their financial affairs and continue as on-going enterprises while giving them protection from creditors. Individuals who are not engaged in business also may use Chapter 11, though the incidence of consumer Chapter 11 cases is small. Trustees normally are not appointed in Chapter 11 cases.

4. Chapter 12. Is similar to Chapter 13, but applies to farmers.

B. Automatic Stay of Collection Actions. The Bankruptcy Code grants debtors protection against creditors immediately upon the filing of a bankruptcy petition. This automatic stay of collections prohibits a creditor from making demands for payment or initiating any legal action to collect a debt without the approval of the court.

Typically, the FOC learns of the bankruptcy filing by receiving a Notice to Creditors. If a debtor claims to be bankrupt but no Notice to Creditors was received, the DSR/LSS should ask the debtor for information about the bankruptcy (location of the court, attorney’s name, date petition filed, bankruptcy case number, etc.) in order to confirm the bankruptcy. In addition to direct contact with the court or the debtor’s attorney, FOC staff may obtain official bankruptcy information from the Public Access to Court Electronic Records (PACER) system or via the Voice Case Information Systems (VCIS).

Collection action should not be suspended based solely on the debtor’s statement that he/she plans to file bankruptcy. Collection actions may continue until a bankruptcy petition is actually filed. The automatic bankruptcy stay becomes effective immediately upon the filing of the bankruptcy petition, whether or not the creditor has notice of the filing. If the debtor states that he/she has filed a petition in bankruptcy, the DSR/LSS should verify the assertion with the bankruptcy court.

Once notified of a bankruptcy filing, FOC staff must cease further contact with the named debtor in an effort to collect the debt. Either the debtor’s attorney, if the debtor has one, or the bankruptcy trustee should be contacted during the automatic stay of collection actions. The DSR/LSS must code DCAMS to prevent inappropriate automated collection activity. Since the Bankruptcy Reform Act of 2005 places limits on the application of the automated stay and does not prevent a secured creditor from sending routine billing statements, payment envelopes, etc. to the debtor, routine billing via DCAMS may continue for a bankrupt debtor if post-petition payments on a secured debt are expected.

In Chapter 12 and 13 bankruptcies, the automatic stay also protects any co-debtors, even if the co-debtors are not named in the petition. However, if a Chapter 12 or 13 plan does not provide for full payment of the claim, or if payments under the plan become delinquent, HUD may seek to have the stay lifted to pursue the non-bankrupt debtor. In many Chapter 13 cases, regular payments may be continued outside of the Plan, while the arrearage (as of the date of the bankruptcy filing) is provided for in the Plan.

If a debt has been referred to TOP or Cross-Servicing, Treasury and HUD must coordinate appropriately to assure compliance with the automatic stay if the debtor files bankruptcy. If HUD receives notice of a bankruptcy, DCAMS must be coded to suspend offset action via TOP, and a request to recall the case from Cross-Servicing should be processed. If Treasury receives notice of a bankruptcy, Treasury will return the case to HUD and DCAMS must be updated.

The automatic stay may be lifted by court order. In addition to authorizing action against non-bankrupt co-debtors, a lifting of the stay may allow a secured creditor to initiate or complete legal action (foreclosure, repossession) against secured property. FOC staff should seek legal guidance in such matters.

C. Proofs of Claim. The DSR/LSS must submit a Proof of Claim to evidence HUD's right to a share of any distribution of assets or income from a debtor's bankruptcy estate unless the court or the trustee notifies HUD that filing is not necessary. A Proof of Claim must be filed before the deadline set by the court to avoid the possible rejection of the claim. Chapter 7, No-Asset bankruptcies do not require a Proof of Claim to be filed since the court does not anticipate any distribution. If the trustee subsequently discovers assets, he or she will notify the creditors of a new claim-filing deadline.

If an insured Lender has already filed a Proof of Claim concerning the subject debt, and there has been no discharge of the debtor, the DSR/LSS must take the necessary actions to have HUD substituted for the Lender as the creditor in order to directly receive future Trustee disbursements. (See Bankruptcy Rule 3001.)

The DSR/LSS should follow the instructions on the Proof of Claim form regarding supporting documents and security instruments. The DSR/LSS must state on the Proof of Claim the entire amount owed by the debtor up to the date of bankruptcy filing, and indicate whether HUD's claim is secured or unsecured. It may also be necessary to state the amount of the debt that was due pre-petition (i.e. before the bankruptcy was filed) and whether the debt is subject to continuing interest, penalty, and/or administrative cost charges.

For Chapter 13 bankruptcies, the DSR/LSS should review the proposed repayment arrangement. If there is an objection to the plan’s proposed treatment of HUD’s debt, the DSR/LSS should contact the appropriate HUD counsel to determine the best course of action. Normally, the time for objecting to the plan is quite short.

D. Motions Affecting Security.

A concept known as "cramdown" may be used in bankruptcy proceedings. Although most typical for bankruptcies filed under Chapter 13, cramdown proceedings may occur under other chapters. If the court approves a cramdown, the claim filed by the secured creditor is limited to an amount equal to the value of the collateral, rather than for the full amount of the debt. The balance of the debt is then allowed as an unsecured claim, with a likelihood of a small percentage of payment. For example, if the full debt is $10,000, but the collateral is valued at $8,000, a cramdown action would result in a secured claim of $8,000, and an unsecured claim of $2,000. In some cases, the debtor may seek to have a secured claim treated as totally unsecured by filing a Motion to Avoid Lien. The court will evaluate these motions based upon facts submitted concerning property values, lien position and the debtor's exemptions.

The facts of the case should be reviewed to see if the debtor’s valuation of the collateral is inaccurate or if there is other basis for HUD to oppose a cramdown or lien avoidance action. If it is in HUD’s best interest to oppose the action, the matter should be referred to the Department of Justice for action. FOC staff should seek advice of appropriate HUD counsel if there are any questions or concerns.

E. Reaffirmation. Reaffirmation is a process of confirming or reestablishing personal liability for secured loans. The Bankruptcy Reform Act of 2005 made substantial changes to reaffirmation requirements, including adding many required provisions to reaffirmation agreements. Execution of a reaffirmation agreement normally is at the debtor’s option and cannot be required by a creditor. The bankruptcy court must approve a reaffirmation agreement. While a reaffirmation agreement is not required for Title I loans or other debts serviced by the FOC, a reaffirmation after bankruptcy could be present on an FOC case based on an action initiated by the debtor. For a Title I manufactured home loan or secured property improvement loan, the debtor may have entered into a reaffirmation agreement prior to the assignment of the loan to HUD. If the debt is reaffirmed, and the debt was previously coded as bankrupt, DCAMS must be updated to allow for continuation of the collection cycle. FOC staff should seek advice and guidance from the local HUD Office Chief Counsel if there is any question regarding the existence or validity of a reaffirmation agreement.

F. Distributions. The DSR/LSS should monitor bankruptcy cases to ensure that HUD receives the funds allocated to it in the bankruptcy plan. HUD typically receives no distribution from a Chapter 7 bankruptcy. In general, HUD may seek foreclosure after Chapter 7 discharge if the mortgage continues to be in default.

Chapter 12 and 13 bankruptcies usually result in a distribution of funds to HUD. Payments made by the debtor through the trustee are for debts inside the plan. Payments made directly by the debtor are for debts outside the plan. Usually, direct payments outside the plan are for installment payments on a secured loan that are due subsequent to the filing of the bankruptcy petition. FOC staff must not contact the debtor to attempt to collect any pre-petition debts or payments to be made inside the plan. FOC staff should consult with the local HUD Office Chief Counsel to clarify any questions regarding the pre or post-petition classification of a particular debt.

The DSR/LSS should contact the trustee if payments scheduled within the plan are not being received. The DSR/LSS may contact the debtor's attorney, if the debtor has one, to ask about payments outside the plan. If payments are still not forthcoming, the DSR/LSS should consult the local HUD Office Chief Counsel for potential remedies.

If an insured Title I lender initially filed a Proof of Claim, the trustee may have distributed bankruptcy funds to the lender. HUD should collect such funds from the lender if they were not accounted for on the Claim for Loss.

A lender-filed Proof of Claim may request continuing interest payments based on the original Title I note. Since this rate is usually greater than the federal claim rate assessed by HUD, HUD may receive trustee disbursements that create a credit balance on HUD’s records. Since the determination of the amount owed and the authorized rate of interest were approved by the court, a refund of any DCAMS credit balance is not required, unless there were post-bankruptcy payments that were not remitted by the Trustee.

G. Payments Obtained by Offset or Garnishment. HUD may retain TOP offsets or Administrative Wage Garnishment (AWG) payments that were processed prior to the date of bankruptcy filing. TOP offsets (other than federal tax refund offsets) or AWG payments that are processed after the date of bankruptcy filing must be refunded. The decision to refund or retain a post-bankruptcy tax refund offset must be made on a case-by-case basis with legal advice and assistance obtained as warranted. The DSR/LSS should examine all pertinent dates and actions, and consider any "injured spouse" potential before issuing a refund.

H. Discharge. The court grants a debtor a “discharge” from bankruptcy if the debtor meets all of the requirements of the court. This discharge relieves the debtor of personal liability for pre-petition debts included in the bankruptcy. For Chapter 13 cases, a discharge is usually issued after the debtor has made all the payments that were required by the approved bankruptcy plan. The creditor typically receives a notice from the Court as evidence of the discharge. For no-asset, Chapter 7 cases, all pre-petition debts are normally discharged, including debts not specifically listed by the debtor.

After a Chapter 7 discharge, the FOC may not resume collection activity against the bankrupt debtor based on the personal liability of the debtor. After a Chapter 13 discharge, the FOC may resume collection activity against the bankrupt debtor based on the personal liability of the debtor if the debt is secured and also if the last payment on the debt is due after the due date of the final payment due under the Chapter 13 plan. If the debt is secured, collection activity against the security property in the ordinary course of business may resume post-discharge for both Chapter 7 and Chapter 13. The DSR/LSS should contact the local HUD Field Office Chief Counsel to clarify any question regarding whether a particular debt is subject to a bankruptcy discharge and/or regarding what collection actions may be taken post-discharge.

I. Dismissal. The court can dismiss the bankruptcy if a debtor does not meet the provisions of a bankruptcy plan or for other good reasons. A dismissal means that the bankruptcy is cancelled, the automatic stay is lifted, and the personal liability of the debtor continues. The creditor typically receives a notice from the Court as evidence of the dismissal. On receipt of a dismissal notice, FOC staff must code DCAMS to allow for the resumption of normal collection activity.

J. Post-Bankruptcy Collections. The DSR/LSS should resume normal collection activity against a debtor if the court dismisses the debtor's bankruptcy or if the subject debt was not included in a discharge. When evaluating collection strategy, the DSR/LSS should be aware that a debtor can petition the court to have a pre-petition debt that was not originally included, retroactively added to bankruptcy discharge.

After discharge, or earlier, depending on the terms of the plan, collection activity may resume against co-debtors not included in the bankruptcy if the FOC suspended such activity due to a Chapter 13 proceeding. After discharge, FOC staff may initiate collection activity against the debtor's property based upon an existing lien if the court has not invalidated the lien during the bankruptcy proceedings. Foreclosure activity based upon an existing lien can be pursued after discharge if it is economically feasible.

While a Chapter 7 discharge does not void the lien on a secured debt, this will not always hold true for a Chapter 13 discharge. Whether or not HUD may attempt to collect via the security, or if HUD is obliged to provide a release of lien, will depend on the particulars of the specific Chapter 13 case as follows: HUD must provide a release of lien when the Court specifically orders HUD to do so. If the court does not specifically order a release of lien, but it is clear from other documentation that HUD’s lien has been avoided, satisfied, extinguished, or otherwise cancelled via the bankruptcy, HUD should release the lien. FOC staff must not attempt to negotiate a payment in exchange for such a release. Similarly, HUD must consider a discharged debt as Paid in Full if so ordered by the court or if other documentation confirms that the court views the debt as fully satisfied – even if a balance remains unpaid according to HUD’s records. FOC staff should seek advice from the local HUD Office Chief Counsel on such matters when warranted.

K. Close-out. FOC staff should initiate a close-out of a bankruptcy account if:

1. The FOC has documentation to confirm that the court has discharged the subject debt,

2. HUD has received its allocated payments, if any, and,

3. No collection potential exists against the debtor's property or non-bankrupt co-debtors.

FOC staff should follow normal closeout procedures when closing such an account. (See Chapter 5.)

3-7 TREASURY OFFSET APPEALS. When a debt becomes delinquent, the FOC issues a Notice of Intent to Collect by Treasury Offset (NOI). (See additional information in Paragraphs 2-12 and 4-2, and a sample NOI in Appendix 9.) This notice informs the debtor that HUD intends to refer the debt to the Department of the Treasury for administrative offset of federal payments (via TOP) if the debt is not resolved. The notice also informs the debtor that he/she has a right to an administrative review of the debt (i.e. an appeal). The HUD Office of Appeals (HUDOA) conducts the review unless the debtor is a federal employee. The HUD Office of Administrative Law Judges (OALJ) conducts the review for Federal employee debtors because TOP may result in the offset of the debtor’s federal pay. The Notice of Intent instructs the debtor to write directly to the HUDOA to request a review/appeal.

If an appeal is submitted timely or is otherwise accepted by the HUDOA, the HUDOA will place the appeal on its docket and will forward a “Notice of Docketing” along with the debtor’s request for review to the designated HUD Counsel for response. (Note: if the debtor is a federal employee, the HUDOA will route the request to OALJ for similar handling.) Region II Counsel handles appeals for Regions I, II, III, and IV. Region X Counsel handles appeals for Region X. Region V Counsel handles appeals for all other regions. If a TOP appeal is before the OALJ rather than the HUDOA (i.e. a federal employee), the Program Compliance Division in HQ OGC handles the appeal. The HUD Counsel handling an appeal transmits a copy of the HUDOA’s Notice of Docketing to the FOC or otherwise notifies the FOC that the appeal has been filed. The FOC’s designated appeal coordinator must code the case in DCAMS to insure that the debt is not subject to offset while the appeal is pending. The FOC also coordinates with HUD Counsel to prepare HUD’s response to the debtor’s defense(s).

Generally, the HUDOA limits its review to a determination regarding whether the debt is legally enforceable and past due, and does not consider issues concerning financial hardship or voluntary repayment terms. Once the HUDOA has issued a final Decision and Order, the FOC’s appeal coordinator recodes the case in DCAMS based on that decision. The HUDOA authorizes HUD to proceed with offset action for cases that are decided in HUD’s favor. Cases decided in the debtor’s favor or dismissed by HUDOA must be handled as directed by the HUDOA. The HUDOA has the authority to make the final decision for HUD regarding these matters.

3-8 AWG APPEALS. HUD may seek to collect a delinquent debt via Administrative Wage Garnishment (AWG). (See additional information on AWG in Paragraph 4-4.) The AWG process begins with a “Notice of Intent to Initiate Administrative Wage Garnishment” letter. Treasury or a Treasury contracted private collection agency will issue this notice for debts referred to Treasury Cross-Servicing. Otherwise HUD issues the notice. This notice informs the debtor that HUD intends to collect the debt via AWG and informs the debtor of his/her due process rights, including the right to an administrative review of the debt (i.e. an appeal).

AWG appeals are handled similar to TOP appeals (see Paragraph 3-7) with two significant differences:

A. Financial Hardship. In addition to challenging HUD’s determination that the debt is legally enforceable and past due, the debtor may request a review on the basis that the proposed garnishment (or HUD’s alternative payment terms) would create a financial hardship for the debtor. The HUD Office of Appeals has the authority to disapprove AWG or to reduce the amount of the garnishment based on its evaluation of the debtor’s financial circumstances.

B. Treasury Coordination. Though Treasury or a Treasury-contracted private collection agency may initiate AWG action, the HUD Office of Appeals conducts the AWG hearing, and HUD Counsel handles HUD’s response to the debtor’s defenses. The OGC jurisdictions for AWG appeals are the same as for TOP appeals (see paragraph 3-7). Thus, FOC staff must coordinate with Treasury to assure that any subsequent garnishment action is appropriate.

9. APPEALS OF HUD COLLECTION DECISIONS. The policies and procedures for most all collection decisions/actions of the FOC are presented in this handbook under their applicable headings (e.g. Paragraphs: 2-6 Establishing Payment Plans, 2-8 Settlement by Compromise, 3-3 Credit Bureau Reporting Disputes, 3-7 Treasury Offset Appeals, 4-1 Penalties and Administrative Costs, etc.). If a debtor contests or disputes a collection decision/action that is not covered elsewhere in this handbook, the DSR/LSS should provide a detailed explanation regarding the basis for the decision/action in question including copies of relevant documentation, statutes and regulations. If this explanation does not resolve the dispute, the DSR/LSS should request that the debtor provide details and documentation regarding the issues in dispute. The DSR/LSS must evaluate this information and respond to the debtor. If there is any question regarding HUD’s response, the DSR/LSS should consult with his/her supervisor.

If the DSR’s or LSS’s efforts to resolve the contested decision/action are unsuccessful, the case should be routed to the FOC Director for an official determination, which shall be communicated to the debtor in writing.

3-10 REPURCHASE OF LOANS. [Ref.: 24 CFR 201.54 (h)] HUD may demand that a Title I lender repurchase a loan (i.e. return HUD’s claim payment in exchange for a reassignment of the loan) if HUD determines that the lender did not substantially comply with HUD’s requirements for originating, administering, or servicing a Title I loan that resulted in a claim. Absent fraud or misrepresentation by the lender, a demand for repurchase must be made within two years after claim payment. If a violation of HUD’s requirements is identified, the FOC will determine if a repurchase demand is warranted.

A. Policy. Since the FOC’s Claims Branch carefully reviews the documents submitted by the Title I lender prior to claim payment, the FOC’s Asset Recovery Division (ARD) should not re-process a claim, but should be alert for potential repurchase issues that could come to light through their normal servicing and collection activity. For example, contact with the borrower may reveal information not contained in the lender’s claim submission, or the borrower may offer an apparently valid defense to HUD’s effort to collect.

While the regulations authorize HUD to seek repurchase within two years after claim payment, HUD policy implemented via Title I Letter TI-429 is that HUD will normally limit the period of time within which it will request repurchase of a property improvement loan to a period of one year. A demand for repurchase for a property improvement loan after one year should be limited to violation(s) that HUD could not reasonably be aware of earlier.

B. Criteria. Potential repurchase issues may be identified as a result of telephone conversations with debtors or interested third parties, letters written by debtors, or routine review of the claim binder during servicing. Since the lender is required to provide HUD with a valid and legally enforceable debt, repurchase will usually be appropriate if the debtor has a valid defense against HUD’s effort to collect the debt. Any of the following may also form a basis for repurchase:

• Unresolved consumer complaints,

• Allegations of forgery,

• Release of liability without HUD approval,

• Promissory Note/Installment Contract/Security Instrument not signed by the debtor,

• Original Note/Contract not submitted by Lender,

• Failure of the Lender to protect HUD's interest.

C. ARD Process. Where repurchase appears warranted, the Debt Servicing Representative should prepare a written repurchase recommendation. The claim binder and supporting documentation, including information on the specific HUD regulation or requirement that was violated shall be included with the recommendation. The Director of the ARD then reviews the recommendation. If the ARD Director determines that there is a sufficient basis to continue processing, s/he transmits the case to the Director of the FOC’s Insurance Operations Division (IOD).

D. IOD Process. The IOD Director makes the final decisions to demand repurchase. Staff of the IOD prepares the repurchase demand letter, which should direct the lender to remit payment based on the appropriate procedure then in effect (i.e. via check to a Treasury lockbox, via , etc.). Staff of the IOD shall handle all post-demand activities. These activities include processing offset of other Title I claims if the lender does not remit payment, updating automated systems, and reassigning the loan to the lender when payment is received or effectuated through an offset.

If the lender does not pay voluntarily and if collection via internal offset of another Title I claim is not feasible, then IOD staff should load the case into DCAMS as a generic debt (see Chapter 8). The debt should then be subject to all appropriate collection tools as outlined in this handbook including referral to the Treasury Offset Program (See Paragraph 4-2) and to the Department of the Treasury for Cross-Servicing (See Paragraph 4-3). As part of its Cross-Servicing program, Treasury will refer unpaid repurchase debts to the Department of Justice for litigation if they deem such action appropriate.

E. Impact on Collection Activities. Collection activities against the debtors must be suspended while a repurchase case is being processed if the repurchase is based on a question regarding the validity of the debt. In such case, DCAMS must be updated to prevent continued collection action (including offset) until a final determination is made. Since repurchase may lead to a reassignment of the loan to the Title I lender, HUD staff must exercise care when communicating with the debtor(s) to insure that HUD does not prejudice the lender’s rights to collect the debt.

3-11 REFUNDS. In the course of the debt collection process, overpayment or improper recoveries may occur, requiring a refund. See Paragraph 7-2 for guidance in processing refunds.

3-12 PRE-FORECLOSURE SALES. The HUD pre-foreclosure sale program is a loss mitigation option for HUD/FHA insured mortgage loans (i.e. Title II loans). The pre-foreclosure sale option allows a borrower in default to sell his or her home and use the sale proceeds to satisfy the mortgage debt even if the proceeds are less than the amount owed. This option is appropriate for borrowers whose financial situation requires that they sell their home, but who are unable to sell without FHA relief, because the value of the property has declined to less than the amount owed on the mortgage. If the FOC is servicing a debt that is secured by a lien on a property that has been approved for the pre-foreclosure program, the DSR/LSS should negotiate the best possible settlement for a release of the lien. If the borrower is to be provided with funds as an incentive to participate in the program, these funds may be used as part of the negotiated settlement. The settlement may be for the release of lien only or may be a full compromise as warranted by the particulars of the case. See also Paragraphs 2-8 and 2-9 regarding settlements by compromise and partial settlements.

3-13 SHORT SALES. A short sale occurs when the sale price of a home is insufficient to pay off all outstanding liens and associated required closing costs. If the buyer is unwilling to increase the purchase price and the seller is unwilling or unable to advance the additional funds to make up the difference, then the sale will not usually proceed to closing without special arrangements. In this instance, the seller may ask all or some of the lien holders to release their lien for less than the full amount owed. (Note: The HUD pre-foreclosure sale program is an example of a short sale where the property value does not cover the amount due on the first mortgage and HUD insures the mortgage.)

Lien holders may determine that it is in their best interest to cooperate to facilitate the pending sale and to accept a reduced payment rather than risk receiving a smaller payment, or nothing at all, should there be a foreclosure action or bankruptcy action. Ordinarily, the more junior the lien position, the weaker the lien holder’s negotiating position. Approval of a short sale release of lien need not include a release of liability for the associated debt, though the borrower/seller may seek to have a full release included as part of the deal.

If the FOC is servicing a debt that is secured by a lien on a property that is involved in a short sale, the DSR/LSS should negotiate the best possible settlement for a release of the lien. The settlement may be for the release of lien only or may be a full compromise as warranted by the particulars of the case. See also Paragraphs 2-8 and 2-9 regarding settlements by compromise and partial settlements, and Paragraph 2-10 and 2-11 regarding a request for a release of lien.

3-14 DEBT UNENFORCEABLE DUE TO STATE LAW CONSTRAINTS. California, Oregon, and Washington have “anti-deficiency” laws that prohibit the enforced collection of debts that remain after legal action to obtain and liquidate property that was pledged as security for a loan. Since Title I Manufactured Housing (MH) claims held by HUD are post-repossession deficiency debts, HUD’s collection process is limited to seeking voluntary collection for Title I MH claims in the these states. If such voluntary collection efforts have failed, the debt must be written off as "unenforceable" and the account closed. When there is any doubt about the propriety of a specific action on a case, and in all other cases where a debtor asserts that HUD’s claim is not enforceable due to state law constraints, FOC staff should seek advice and guidance from the local HUD Office Chief Counsel.

3-15 DISASTER RELIEF. HUD encourages FHA-approved lenders to use all available forbearance measures to assist borrowers who have experienced a loss of income or other financial difficulties resulting from major disaster. A similar principle must guide HUD’s collection activities for HUD-held debts.

A. Disaster Declaration. Federal disaster relief activities begin when the President declares a major disaster. A listing of the affected counties, the official beginning and expiration dates, and other details regarding a disaster declaration may be obtained from the Federal Emergency Management Agency (FEMA) website: .

B. Policy. While the designation of a disaster area is one of the prerequisites for certain types of relief, the designation alone, does not automatically trigger special servicing exceptions or convey upon individual debtors specific rights related to HUD collection activities. In most instances, the specific determination of what type and level of relief to provide should be made on a case-by-case basis. The FOC Director will advise the FOC staff if other policies will apply to a particular disaster.

FOC staff should exercise the maximum prudent leniency in servicing these accounts. The intent should be to ensure that debtors with accounts in the affected disaster areas are not unnecessarily burdened with additional demands during a challenging period. As appropriate, payments on the debt may be reduced, delayed, or suspended. Also, if warranted, DCAMS coding may be updated to suspend automated collection actions including offset action via TOP.

HUD may instruct Treasury Cross-Servicing to suspend collection action against debtors living in a disaster area, if the FOC Director determines that such action is warranted. Otherwise, Treasury or its private collection agency will respond similarly on a case-by-case basis.

Hardship closeout may be considered where there is no reasonable prospect that the debtor will ever be able to resume payment (even if relocated from the affected disaster area). To ensure that HUD is able to account for and appropriately report all losses directly related to a particular event, a record should be made of all cases closed out without collection as a result of a federally designated disaster.

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